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Major oilfield services provider Halliburton Company (HAL - Analyst Report) reported in-line third quarter 2012 results, as robust results from its international business was offset by cost inflation.

Earnings per share from continuing operations (excluding special items) came in at 67 cents, matching the Zacks Consensus Estimate.

However, the company’s per share adjusted profits came sharply lower than the third quarter 2011 level of 94 cents (excluding an asset impairment charge) amid sluggish activity in its core North American operations.

Revenues of $7.1 billion were 8.6% greater than that achieved during the third quarter of 2011 but narrowly failed to surpass the Zacks Consensus Estimate of $7.2 billion, even as sales increased across the company’s business units.

During the quarter, North America accounted for approximately 55% of Halliburton’s total revenues as well as its operating income.

Segmental Performance

Completion & Production: Revenues for Halliburton’s Completion and Production segment were down 3.7% sequentially but improved 6.7% year over year to $4.3 billion.

Segment operating income was $591 million, a 35.3% sequential decrease and was down 44.7% from the year-earlier level.

In particular, operating income in North America nosedived – by 60.1% year over year and 44.6% sequentially – hamstrung by a tight pricing environment and cost escalation for production enhancement services.

The dismal showing in North America – responsible for two thirds of the segment profits – was somewhat offset by improved production enhancement activity in Australia and better tools results in Malaysia.

Drilling & Evaluation: Revenues from Halliburton’s Drilling and Evaluation business were 1.6% above second quarter levels and improved by a healthy 11.7% year over year to $2.8 billion.

The segment’s operating income rose 9.4% from the June quarter and 16.5% from the year-ago period to $430 million. This was driven by higher activity in Canada and improvement in wireline business throughout North America. Results were further propelled by enhanced activity levels in Mexico and Malaysia, higher demand for fluids in Norway and Russia, as well as improved levels of directional drilling and wireline activity in Saudi Arabia.  

Balance Sheet

Halliburton’s capital expenditure in the third quarter was $868 million. As of September 30, 2012, the company had approximately $2.0 billion in cash and $4.8 billion in long-term debt, representing a debt-to-capitalization ratio of 24.1%.

Outlook

Halliburton management pointed out that third quarter profitability took a hit from pricing pressure in its market-leading hydraulic fracturing ('fracking') procedure, a spike in the costs for guar gums, and Hurricane Isaac-related shutdowns.

However, the world's second-largest oilfield services company after Schlumberger Ltd. (SLB - Analyst Report) believes that despite certain issues in North America – characterized by depressed natural gas fundamentals and cost inflation – the long-term prospects for the business remain robust.

The bright spot for Halliburton during the quarter was its international operations, where the company enjoyed strong demand for its services. It expects the trend to continue in the coming years.

Going forward, Halliburton anticipates benefiting from its leading position in the North American oilfield services market, improving upon its international margins, and expand market penetration in deepwater and underserved international regions.

We expect these trends to result in a strong operating environment leading to the delivery of positive earnings surprises.

Rating & Recommendation

Halliburton currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

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